Last week saw the dollar retreat overall as the bullish case was negatively impacted by continued disappointment in the actual inflation data despite the ongoing Fed rhetoric that another rate hike is coming by Christmas. Of course, there were other stories to help the cause including stronger commodity prices underpinning that bloc and comments from several European officials that an interim deal with the UK might be possible. This morning, however, the dollar has regained its footing and has edged higher on balance.

It seems that the mood from the G30 conference in Washington this weekend was somewhat schizophrenic. While the US contingent remained upbeat about economic prospects in the near term, looking at improving growth and the strong employment picture as leading to their desired, if elusive, rise in inflation, both European and Japanese leaders were far less positive in their outlook.

Kuroda-san made clear that the BOJ was not even contemplating the ending of QQE in Japan, nor the targeting of 10-year JGB yields at 0.0%. With inflation in Japan running at 0.7%, well short of the 2.0% goal, Kuroda said, “The Bank of Japan will consistently pursue aggressive monetary easing with a view to achieving the price-stability target at the earliest possible time. Achieving the 2% target is still a long way off.”

Meanwhile, Draghi and friends were at pains to point out that inflation in Europe also remains far from its goals but that their current policy settings were doing the job. “Therefore, we’ve got to be persistent with our monetary policy,” Draghi said. “We also have to be prudent” and will maintain “an extraordinary degree of monetary accommodation.” I don’t know about you, but that certainly sounds to me like any changes that are coming will be minimal, at best.

Of course, the ECB hawks couldn’t let Draghi have the last word and commented on the fact that based on the ECB’s current, self-imposed restrictions, they can only purchase another €200 billion or so to add to the €2.3 trillion already purchased. The implication here being that QE doesn’t have much more time in it after all. However, despite this unwelcome hawkish tilt from Jens Weidmann, President of the Bundesbank, the market appears to be more in step this morning with Draghi and the doves, hence the euro’s 0.25% decline.

If I were to sum up the G30, then, I would say that financial officials are not adhering to the prevailing FX market narrative. The G30 sees stronger growth leading to higher inflation and higher rates in the US while the rest of the world continues to see inflation as elusive and will continue to pursue extraordinary monetary policy ease. That is not a prescription for the dollar to fall!

Away from the G3, the biggest surprise to me is the consistent decline in the market perception of Canada’s rate hike prospects. Just a month ago, the market was pricing in a 75% probability that the BOC would raise rates by December. That has fallen to less than 50% today. What’s interesting is that during that time, Canadian data has maintained a solid performance, with growth and employment doing well, and inflation edging ever higher. During that period the Loonie has also weakened nearly 4%, although in fairness, it has done little over the past two weeks. What I would say is that if we continue to see that probability slide lower, USDCAD has room to move higher. It seems that, for now, CAD has disconnected from commodity prices.

In the EMG bloc, the most noteworthy action has been the decline of the Mexican peso, falling 0.75% on renewed concerns that the ongoing NAFTA negotiations are starting to turn negative for the country. This has the added impact of helping the electoral prospects of AMLO, the hard-left Presidential candidate, and that combination will not be a positive for the Mexican economy. With the peso through 19.00 this morning, for the first time in 5 months, I fear there is further room for decline there. Otherwise, this broad bloc of currencies has shown unimpressive activity overnight and has maintained the bulk of last week’s gains vs. the dollar.

On the data front this week, we see the following:

Today Empire Manufacturing 20.5

Tuesday IP 0.2%

Capacity Utilization 76.2%

Wednesday Housing Starts 1175K

Building Permits 1240K

Fed Beige Book

Thursday Initial Claims 240K

Philly Fed 22.0

Leading Indictors 0.1%

Friday Existing Home Sales 5.30M

It strikes me that this list of data is not that likely to drive the FX markets although if everything leans in one direction we could certainly see a cumulative effect. We also hear from six more Fed speakers, including Chair Yellen on Friday evening, but given the timing of her speech, any impact there won’t be felt until Sunday in Asia.

Lately, however, the FX market seems to be all-in on the narrative of slowing Fed activity and imminent policy tightening elsewhere. Certainly equity markets continue to believe that story as there is no evidence the inflating bubble is of any concern to most investors. As such, it is hard to make a case that the dollar will rally in the short term, although if we see strong data across the board this week, it may be enough for a little benefit. That said, nothing has changed my view that the narrative is wrong here, and as it adjusts over time the dollar will strengthen. However, I am hard pressed to make a case that the dollar weakens much from these levels either.